- 49 -
The realization of the “plan” is demonstrated in a
stipulated exhibit. For example, in 1992 ERG had $2,704,096 in
total sales and allocated $275,867 in royalties to NPI.46
Similarly, in 1993 ERG had total sales of $2,440,139 and
allocated $244,023 in royalties to NPI.47 ERG reported a profit
in 1989, 1990, and 1993 of $77,930, $79,576, and $76,941,
respectively.
Because many of ERG’s payments to NPI were made after the
purported royalties and engineering services were supposedly
earned, there had to be a plan or basis upon which the funds were
attributed to the tax years at issue.48 At trial, Mr. Bradac
46NPI’s original 1992 return reported royalty income of
$907,443.
47NPI’s original 1993 return reported royalty income as
$220,000.
48Jill Toibin, C.P.A., prepared the Bensons’ 1992 Form 1040.
On or about Oct. 3, 1996, Toibin wrote a memorandum to her file
which states in pertinent part:
I asked Burt if all disbursements from ERG were
ordinary and necessary business expenses of the
corporation and he confirmed in the positive. He
indicated that the corporation has a royalty agreement
with New Process Industries (a related corporation).
In addition, New Process provides services to ERG
through the action of the employee owner (himself) that
are not covered by the rent agreement, so that
engineering services are paid to compensate the
corporation for these services.
At trial, Toibin testified that the classification of
engineering services was on the basis of Burton’s representations
that he provided “know-how, show-how, something of value to NPI”.
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